compared to future generations19 .
5.4 Sensitivity and risk
The calculations presented above apply to the base scenario, but various as-
sumptions can of course be discussed. Moreover, it is important to identify the
risk factors which may affect public finances the most. It is therefore impor-
tant to perform a sensitivity analysis. The results of such sensitivity analyses
are given in table 1 in terms of the changes in the sustainable tax rate. Similar
analyses can easily be done for the PAYG-tax but are left out here to economize
on space.
Table 1. Sensitivity — changes in the base tax rate under various
alternative assumptions
Change in base tax
Base scenario 7.9
Demographics
UN growth in life expectancy 16.7
Increased fertility (from 1.7 to 1.8) 8.6
+5000 immigrants annually - more developed countries 7.9
+5000 immigrants annually - less developed countries 11.2
Welfare services and leisure
0.10% reduction in work time per year 1.0
extra 0.15% real growth in welfare service per year 15.6
Labour market
Higher labour force participation descendants
from less developed countries 6.2
Interest rate and growth
0.5 percentage points higher interest rate 4.8
0.5 percentage points higher growth in TFP 14.0
Health care
"Year to death" and age dependency 7.3
"Year to death" and age dependency +
increasing standards 14.5
Source: Velfærdskommissionen (2005d).
In the following we shall comment on two particular important aspects of
the sensitivity analyses.
19See Jensen et.al.(2002) for a comparison of equivalent variation measures and generational
accounts in the DREAM model. The analysis suggests a similarity in relative changes but
differences between the two measures occur primarily due to differences in discount factors
and the effects of bequest.
20